2021 is full of opportunities – but also full of risks. Just like a company plans for the year ahead by building a budget, so does the trader or investor. 

Macroeconomic analysis refers to the interpretation of major changes in trends and how they affect a portfolio. Think of monetary policy decisions (e.g. Fed shifting from inflation targeting to average inflation targeting), political decisions (e.g., Brexit), or international trade decisions and conflicts (e.g., the birth of the RCEP – Regional Comprehensive Economic Partnership, the largest free trade area in the world, the U.S. – China trade war). Such changes are enough to cause massive turbulence in financial markets – all markets: currencies, stocks, fixed-income, and so one.

What to Prepare for in 2021?

If we refer to a particular country, the macroeconomic risk has four components: financing, commercial, political, and business environment. For instance, in the United States in 2020 the biggest risks from a macroeconomic point of view were, in this order, the political, business environment, commercial, and financing risks. Obviously, the U.S. election sat at the top of the list.

In 2021, the world’s largest economy (i.e., the United States) is at risk of high corporate debt. Also, political polarization is viewed as a threat in 2021. Finally, low productivity may have a big saying in next year’s economic performance in the United States.

Another risk to consider, this time on the global stage, is weak economic recovery. The best-case scenario remains that we will see accelerating global demand, but it all depends on COVID-19 containment.

Also, the risk is that investors grow complacent. Complacency is an issue in investing as it reduces due diligence and increases the dependence on decisions made by others. For instance, think of the stock market and the U.S. dollar. The consensus is that the market will continue to rise on the back of the Fed and US Treasury printing, respectively issuing more. As such, a lower USD should fuel higher equity prices. However, if, for whatever the reason, one of the two institutions is perceived to be reverting their decisions, the risk is for a hard-landing economy.

To sum up, there is always a risk when being involved in financial markets. Risk, by definition, cannot be reduced to zero. However, the better we prepare for it, the less it will impact the portfolios.